Monday, December 06, 2010

Both Blurb and Book in Error

From the Publisher's publicity blurb"

Beyond the Invisible Hand Groundwork for a New Economics by Kaushik Basu

“One of the central tenets of mainstream economics is Adam Smith's proposition that, given certain conditions, self-interested behavior by individuals leads them to the social good, almost as if orchestrated by an invisible hand. This deep insight has, over the past two centuries, been taken out of context, contorted, and used as the cornerstone of free-market orthodoxy. In Beyond the Invisible Hand, Kaushik Basu argues that mainstream economics and its conservative popularizers have misrepresented Smith's insight and hampered our understanding of how economies function, why some economies fail and some succeed, and what the nature and role of state intervention might be.”

CommentA reader sent this notice to me with the publisher’s blurb for Kaushik Basu’s new book (which I am reading just now and posting about on Lost Legacy).

The blurb sums up the book neatly and also why I am so critical of what could have been a greater book. Kaushik Basu writes as if he is certain that his central error is absolutely – no questions about it – the historical truth. It isn’t; it is a myth crafted by those who wanted to give their remarkable constructions (in the sense of mathematical beauty) a pedigree going back to what they made out to be the hallowed memory of Adam Smith. But unintentionally traducing it.

Their genius in formulating the mathematics of general equilibrium (worthy of Nobel memorial prizes) was indeed an achievement, which nobody can deny, but was sullied (in my humble view) by melding GE with Pareto optimality and then blessing it, unnecessarily, with the innocent use by Adam Smith of a popular 17th – 18th century metaphor of ‘an invisible hand’.

That Smith referred to an entirely different subject, which has not yet occurred to Kaushik Basu, who makes the classic mistake of taking the statements in the literature on trust, though they are in Smith’s case, checkable - his books are widely available but not read. There are no prizes for being right on Adam Smith; however, there are prizes for accepting a paradigm in our peer-reviewed journal publications, i.e. (where N[p-rjp] = tenure, etc.).

To be brief: Adam Smith’s example in Wealth Of Nations refers to ‘every individual’ who prefers “domestick industry” to that of “foreign industry”, “render[s] the annual revenue of the society as great as he can”, which is a quantative measure that says nothing at all about “harmony”, “perfect competition”, “distribution”, “matching demand with supplies”, “equilibrium”, poetical or general, or any other condition remotely akin to Pareto optima or the Welfare theorem.

Smith’s example of the “invisible hand” (in his case, the “insecurity” felt by traders for foreign trade) adds to what we call GNP – the whole is the sum of its parts, that’s all. On the grounds that growing GNP promotes opulence and, of necessity, because growth increases the labour that is employed, growth achieves a “public benefit’ in Smith’s lexicon.

It was a post-war invention that Smith’s “self-interested behavior by individuals leads them to the social good, almost as if orchestrated by an invisible hand”, especially that it is formulated by Kaushik Basu (and Samuelson, et al) as “selfish” behaviour , which is an idea antipathetic to Smith’s moral sentiments.

For these reasons Kaushik Basu is not that much different from the “conservative popularizers” he complains about who “have misrepresented Smith's insight and hampered our understanding of how economies function, why some economies fail and some succeed, and what the nature and role of state intervention might be”.

If Basu had left Smith out, or better still if he had used the authentic Adam Smith to good effect in support of his justified criticism of the modern paradigm, his “Beyond the Invisible Hand” would be a better book.